IRS Issues Final Regulations on Estate Tax Basis Consistency

Date September 20, 2024
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On Monday, September 16th, the Internal Revenue Service (IRS) issued final regulations addressing “basis consistency” for certain inherited property. The proposed regulations were initially released in 2016. The final regulations address a number of concerns from practitioners, and are generally viewed as favorable. Following are some relevant changes:

Deadline for Basis Reporting

The proposed regulations required an executor to file a basis consistency report within 30 days after the filing of the estate tax return to provide the basis of any assets a beneficiary could receive, even if the beneficiary would not ultimately receive all assets reported. This requirement created difficulties for estates where the ultimate distribution of assets was not yet determined. Professionals were also concerned about privacy, that beneficiaries were receiving information they may not have been entitled to otherwise.

The final regulations allow the executor to delay reporting assets on the basis consistency report until they determine the assets each beneficiary is to receive. This addresses privacy concerns and eliminates the confusion that many beneficiaries experienced when receiving reports of all assets they could potentially inherit.

Subsequent Transfers

Under the proposed regulations, if a beneficiary subsequently transferred inherited property to someone else, the beneficiary-transferor was required to file a basis consistency report the basis of the property transferred to the transferee. The final regulations remove this requirement for all beneficiary-transferors except trustees of trusts who initially receive inherited property and then subsequently make a distribution to another beneficiary.

Zero-Basis Rule

One rule included in the proposed regulations that caused a significant amount of backlash was the “zero-basis rule.” This rule said that if the executor did not report a property’s basis as required, the basis would automatically be assumed as zero. At the time, the criticisms centered around the harshness of the rule, which would result in significant gain recognized by a beneficiary, and the lack of statutory support for the rule. The rule is not included in the final regulations, though the IRS indicates it will still go after executors who purposefully omit property from the basis consistency report.

Valuation Issues

The final regulations do not address whether a beneficiary who disagrees with a reported value can challenge a valuation in the basis consistency report, a concern that was brought up after the proposed regulations were released. These disagreements most often arise when there are competing interests, and the beneficiaries that receive the inherited property are not necessarily the beneficiaries liable for the estate tax on that inherited property. The IRS indicated that it is considering future guidance that would potentially allow a beneficiary to claim a new valuation with sufficient evidence.

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